contract law essay

The assumption of responsibility can be considered

Date of judgment: 9 July 2008

In January 2003, Transfield Shipping Inc of Panama (Transfield) chartered The Achilleas [2] from the Mercator Shipping Inc of Monrovia (Mercator) for five to seven months [3] . The charter establishes the duty of Mercator to supply the crew and maintain the operation of the vessel while Transfield is responsible for the commercial operation of the vessel [4] . In September 2003, both parties agreed to extend the charter to a further five to seven months and set the date of redelivery at 2 May 2004. On 20 April 2004, Transfield gave a notice of delivery between 30 April and 2 May 2004. Mercator then entered into a new agreement with a third party, Cargill which was to commence no later than eight days after the delivery date stated on the notice of delivery. Less than two weeks before 2 May 2004, an unavoidable matter happened and Transfield was not able to redeliver the vessel until 11 May 2004. Mercator renegotiated with Cargill and decided on later redelivery date. Mercator suffered a reduction in profit and sought damages calculated by the difference between the original and reduced rate under Cargill charter for the entire period of Cargill charter [5] . Transfield argued that the company should only liable for lesser damages calculated for the nine days period from expected latest date of delivery in the notices until the actual date of redelivery where Mercator could not use the vessel [6] .

The case went to the arbitration. Majority was in favour of Mercator’s claim. The case then went to Comercial Court and Court of Appeal. Both courts upheld the arbitration’s decision and regarded the loss in accordance to the first limb of Hadley and Baxendale [7] .

House of Lords

Lord Hoffmann and Lord Hope- Assumed responsibility for the type of loss

Both Lords considered whether Transfield could reasonably expect to have assumed responsibility upon the intention when the contract was created. Transfield did not assume responsibility for losses due to the volatile market condition [8] . If Transfield was aware of the assumed responsibility, the company must ask for some consideration from Mercator as the risk was large and unpredictable. The parties were not able to know about the future charter’s term that would be entered into by Mercator and those rights were undeterminable. The late delivery was an unexpected circumstance beyond the power of Transfield. Damages for late delivery were usually calculated by the difference between markets rate and charter rate for the period of late redelivery [9] . Lord Hoffmann stated that the intention of parties in relation to assumed responsibility for that risk should be considered. Both the Lords agreed to extend the principle of Hadley v Baxendale [10] (Hadley) and decided that the law on remoteness is not only concerned to protect the contractual bargain but to set limits of liabilities and allowed the appeal.

Lord Rodger and Baroness Hale- Reasonable contemplation of the type of loss

Both allowed the appeal on a narrower ground. It was not in the reasonable contemplation of Transfield at the time contract was entered into. The situation was not in ordinary course of things. The volatile market conditions were not in the reasonable contemplation of both parties. Lord Roger approach is similar to the approach in Victoria Laundry Ltd V Newman [11] . Lord Roger believed that the outcomes would be different if Mercator can draw Transfield’s attention to the existence of future charter and allowing Transfield to know the risks of its failure to redeliver the vessels on time [12] . The reasoning is coherent with the principle in Hadley and The Heron II [13] ( Heron II).In relation to the assumption of responsibility, Lord Roger agreed with Lord Hoffmann but he did not consider the assumption in his judgment. Both Lords considered that the volatile market condition was not within the reasonable contemplation of both parties.

Lord Walker- Nature and object of the business transaction

He stated that knowledge is often needed under Hedley and degree of knowledge relates to the nature of business of both parties. Lord Walker agreed with Lord Hoffmann, Lord Hope and Lord Rodger and allowed the appeal.

Discussion

The Anchilleas decision is a controversial issue as two members of the House of Lords suggested that even if the loss is within the first limb of Hadley, if there is no assumed responsibility for the type of loss, the loss is not recoverable [14] . Australia courts tend to cite The Anchilleas but did not apply and discuss the decision of the case suggesting that it may be a good law in Australia [15] . An example of a case that cited The Anchilleas decision is Dome Resources NL v Silver [16] . However, Australia attitude towards remoteness of damages in contract law becomes unclear [17] . It is better assumed that the best test for remoteness [18] in contract in Australia remains the test laid down in Hadley and Heron II [19] . The test is the contemplation, real danger or serious possibility of damage [20] .The assumption of responsibility can be considered but should be restricted to the first limb of Hadley. It can be concluded that Australian courts do not invent a new test for remoteness and the application of The Anchilleas case is restricted to the initial test derived from Hadley.

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